The Square Foot

Residential construction industry to come in for a soft landing in late 2012 and 2013

After brisk activity in the first half of this year, growth in Canada's residential construction industry is expected to moderate through the second half of 2012 and into 2013, according to The Conference Board of Canada's Summer 2012 outlook for the industry.

"The residential market is destined for a soft landing, which means that it will no longer be able to fuel Canada's post-recession growth," said Michael Burt, Director, Industrial Economic Trends. "Next year is expected to be particularly lacklustre, as housing starts and industry profits are both forecast to decline."

Most of the weakness will be concentrated in the multiples segment of the industry, where a significant number of units remain unoccupied. In the next year, the industry will also have to adjust to another tightening of mortgage lending rules. And factors such as relatively low consumer confidence, modest job and income growth, and high household debts will dampen the overall residential construction outlook.

Despite these challenges, the industry remains healthy. The ratio of homeowner equity to real estate assets remains close to the levels of the past 20 years, which indicates that borrowing amounts are still in line with property prices. And low mortgage delinquency rates are further evidence that Canadians are doing a good job of managing their mortgage debts.

Through the first seven months of 2012, housing starts surged 15 per cent over the similar period in 2011, due to a 23 per cent increase in multiple-unit construction. Starts are forecast to decline by 7.3 per cent in 2013 to less than 200,000 units. And regional markets that are exposed to more risks, such as Vancouver and Toronto, will feel more of an effect.

Strong demand and moderate cost pressure will enable the industry to post pre-tax profits of $4.6 billion this year, a 31 percent gain over 2011. However, profits are expected to dip to $4.1 billion next year, before steady growth resumes in 2014.

Future gains, however, will be limited by current high home ownership rates and an expected rise in mortgages rates. As a result, the industry's profits are not expected to return to their pre-recession until 2016.